Pediment Exploration Ltd. (PEZ.V)
March 16 2008
Make that a double double, please!
Forgive my abuse of that uniquely Canadian expression as the lead-in to this missive, but the metaphor strikes me as rather fitting. Born of the coffee-and-donut shop known as Tim Horton’s (or to Canadians as Timmy’s), this expression signifies the wish for ‘rich and sweet’ – double cream and double sugar. I’m skipping here to the bottom line, by the way, just in case you haven’t the time to read what follows. While I am loathe to make price predictions in the junior exploration market (“Fools rush in where angels fear to tread.” – Alexander Pope), by the interjection of the word ‘if’, I am comfortable in projecting that, with continued progress along the current path, Pediment Exploration could enjoy a double in share price within the next 12 months. Moreover, with favourable alignment of the stars, Pediment could become a double double… rich and sweet.
For three days in mid-February, I was given a one-on-one tour by VP Exploration, Mel Herdrick, of key gold exploration properties held by Pediment in both Baja California Sur, near La Paz and Sonora, south of Hermosillo, with one day spent at the Company’s exploration office in Hermosillo. Herdrick is in his mid sixties, with a long career in exploration, including an extended stint as the Chief Geologist for Phelps Dodge in Mexico. He strikes me as someone who knows what he’s doing, and as someone whom I can trust. He’s also very likable, an important trait, as I think it’s true that most people go out of their way to work with likable people. He’s a wanderer, as most good explorers are, constantly veering off the path and picking up stray rocks. I learned first-hand why he wears long-sleeve shirts, and have the scrapes to prove it. I also learned why it’s not a good idea to walk backwards in this prickly terrain. He wanders, stops, ponders, and then wonders, leaving every journey imbued with a sense of (hoped-for) discovery. In my observation, the wheels never stopped turning. I should say that Herdrick didn’t ‘sell the farm’ to enable himself to participate in this adventure. It was a ‘ranch’… in Washington State. He’s all in. For more on Mel Herdrick and other Company officials, click here.
The Company holds a dozen prospective properties in Mexico. My take is that Baja holds the greatest potential, with strong secondary support coming from La Colorada in Sonora.
Mel met me at the airport in La Paz, from which we traveled south and east to Las Colinas, Los Planes, and Fandango for an overview picture of what’s going on. These properties are situated along and aside of the San Antonio Gold Trend, running north and south. At the southern end of the district resides Vista Gold’s property, Paredones Amarillos, the source of more than 2 million ounces of gold. The Pediment property to the north dramatically dwarfs Vista Gold’s property in size, running more than 30 km. from top to bottom.
In a nutshell, my impression is that Las Colinas is a tidy little package (with non-compliant resource estimates of some 350,000 ounces at just over 1 gpt Au). With test drilling well underway, Los Planes has the potential to unfold on a much larger scale, with perhaps 2 million ounces, and the possibility for much more. Mineralization is as thick as 100 metres, with deep oxidation (for glossary definitions of oxidation, click here or here). This means that there exists excellent potential for a starter pit that can quickly cover the capital investment for a low-cost heap leach extraction operation. It wouldn't take great sums of money to make Pediment a standalone oxide ore producer at Los Planes. Three or four years down the road, a large sulphide crusher operation could be put into place, offering a throughput of about 15 thousand tonnes per day. This would place the company in a position, without significant dilution of share value, to process ore below the near-surface oxidized zone. In the meantime, he guesses (stressing that it’s early to say anything with authority), that nine months of heap leaching oxide ore could see the payback of make-ready capital costs. Metal recovery from a heap leach operation ranges between 70-75%, compared to a mill operation, at perhaps 92%. For a backgrounder on heap leaching, see the links here and here.
The Company is now drilling between 15 and 20 RC (reverse circulation) holes per month on its Baja properties. For background reading on reverse circulation drilling, see the link, here.
Reverse circulation drill sample collection system - Layne Drilling Company
Los Planes deposit drilling chip tray, with cuttings from the drill hole at about 188 m. in depth
Pediment also has a core drilling rig in action on the Baja properties.
Pulling out core at the first Fandango hole
I was on site as core was coming out of the ground on the first Fandango hole, core that excited everyone present who was in a position to understand its potential. Fine sulphides were encountered at about 130 metres, and kept going until the point of my departure from the site the next day. Assays are still pending on that hole, but Herdrick and Pedro (Nacho) Teran, the geologist responsible for this project, were talking “Fandango, Fandango”. They explained that one vernacular interpretation of that term is a ‘loud party’. I thought it was a type of dance, but that would have fit the mood, too. They were containing themselves, to their credit, opting to await the lab results, but their attention to this ‘visual discovery’ was palpable. The next day, we visited the core table where box after box from this particular hole yielded the same intriguing core.
Mel Herdrick and Pedro Teran review a map of Las Colinas and Los Planes
This Fandango hole is located 1,500 metres to the west of existing work at Los Planes.
Mel Herdrick can’t wait to see the Fandango core
Removing core from the pipe at Fandango
Visually, the core appears consistent with that from Los Planes and Las Colinas.
Mel Herdrick examines core at the Fandango drill site
Fractured granodiorite with crossing veinlet in core from the new Fandango hole
With the returning injection of ‘if’ here… if results from this new hole (and others yet to come) play out as hoped, then that 2 million ounce target figure has real potential for a further doubling (I do like the sound of that word.). There remains much work to be done before conclusions are drawn. Time alone will tell, but “hope springs eternal” (another Popism).
A future employee checking out the core boxes from Los Planes (nephew of one of the workers)
Leaving the peninsula, La Colorada project, about 40 km. southeast of Hermosillo, is a previously mined area, dating back more than a century.
La Colorada pit, looking westerly, with pit opening into Gran Central pit to the south
Underground mining, concluding in 1914, accounted for some 3 million ounces of mined gold. Until recently, it was the largest producing mine in Sonora. Recent past production at La Colorada was commenced without full exploration on the periphery. In other words, little to no drilling took place beyond the scope of the eventual 3 km. long pit that was developed. Eldorado Gold operated the heap leach open pit mine from 1993 until 2000 (at which point low prices prevailed), after which a local mining company operated the site until it was closed in 2002. Non-compliant historic estimates place some 500,000 ounces of gold at La Colorada. Extension of ore grade is sought both laterally and at depth. Previous operators went down into about 100 metres of mineralized ore. Herdrick sees the potential to go down another 100 metres.
East end road cut (La Colorada), limonite host rocks, Mel Herdrick
Herdrick pointing to a crossing mineralized quartz vein
The countryside (on La Colorada property) is dotted with 100-year-old vertical mine shafts (yet another reason for not walking backwards), offering further guidance to current and future exploration.
Old mine shaft in Veta Madre with 1 metre of 3.1 gpt Au
Veta Madre specimen in hand, showing epithermal quartz vein stockwork filling
Veta Madre specimen with copper stain
Mel Herdrick with his finger stuck in a choya skeleton
Small choya cactus, before Mel sticks his finger in it
Something the Company will need to address, sooner or later, will be its lack of full ownership of this property. While Pediment has acquired, or has options to acquire, 18 concessions, at an accumulated cost of $2.9 million, five other key concessions on this project are controlled by Penoles S.A. de C.V. From my perspective, there are three choices. One would be to negotiate for acquisition of these five concessions at a favourable price before defining the resource, if the Company seriously believes in the project’s potential. By its actions to date, Pediment is a believer. Option number two would be to wait until resources are proven on the 18 controlled concessions, and pay a premium to Penoles, be that for full control or in the form of a royalty on the proceeds of future work. Pay me now or pay me later. Option three would be to proceed without the five concessions, leaving potentially significant resources unexploited. It’s not for me to judge the best path for the Company on this one, as I’m just sitting in the peanut galley, wondering. “A little knowledge is a dang’rous thing…” (Pope again).
In addition, full surface rights have not been negotiated project wide for La Colorada, presenting the potential for meaningful stumbling blocks and upside costs in dealing with local property owners. The devil is in the details. Herdrick acknowledges these as numerous ‘to-do list’ items in need of attention. This said, the incoming president of the local ejido (a collective of communally held lands) is an employee of the Company, providing some comfort in the assurance of open communications with the community at large.
Mexico is mining friendly. See the link here for related discussion.
Here’s what I like about La Colorada. Infrastructure requirements pose no great obstacles to moving smoothly and inexpensively into production. Power has already been linked to the site, and can easily be reconnected. Access to the property is already in place with much roadwork already prepared. The terrain is gentle in slopes, offering little challenges of steep relief. Labour is ready and willing. Water is plentiful. The site already has a heap leach pad, with little necessary work involved to make ready.
Heap leach pad at La Colorada, piping of pvc pipe still in place on leached ore
The site also has an existing plant that can be refurbished, the end of which is pouring gold into bricks.
La Colorada precipitation plant
The heap leach and plant facilities can be put back into a production state for next to nothing.
Sasquatch cruising La Colorada – westerly view along trend of main vein system. Wall rocks are andesite in north wall to the right, and intrusives to the south
There's hope for as much as 2 million ounces of gold to be defined this year at La Colorada. While he didn't say so, I have the feeling that Herdrick already sees over 1 million ounces there. He’s targeting to drill 25-30 400 metre holes at La Colorada as soon as possible. With two 10-hour shifts per day, they’re completing 70 metres of core drilling per day.
Beyond the west end of La Colorada pit is an outcrop of La Colorada vein, sample of 1.2 m. at 2.63 gpt Au and 152 gpt Ag
Creston pit, including the black hole remnant from underground mine of a century ago (see the zoom, about the middle of the video). The pit is about 130 m. deep, with perhaps 30 m. of it in water.
From inside the Creston pit, westerly view along vein trend, dipping northerly
The Caborca copper project is referenced in the October 18 2007 News Release as a shared project with Inmet Mining. Inmet was to fund ($250,000) the core drilling of six holes, totaling 2,000 metres. Inmet further has the opportunity to earn a 70% interest in the project, contingent on an additional investment of $5,000,000 in related exploration. Having read through all News Releases in preparation for my site visit, I was unable to find any update on drilling results. When I asked Herdrick how that project was going, he advised that drilling was completed but that nothing of significance had been found. When I later spoke with Gary Freeman at PDAC, he added that Inmet had not yet given up on this project, and that more work there may be forthcoming. Hmmm…
We did not visit the Daniel project to the north of Hermosillo, as it would have required a full day’s travel (my choice to take a pass, having caught the nasty west coast flu bug earlier that week in Los Angeles). It didn’t come up much in conversation as I listened to the Company’s story, so I’m not in a position to comment, favourably or otherwise, on this project. I’ll leave others to add value to the discussion on this account.
The Company has 40.3 million shares issued and outstanding, with 51.8 million, fully diluted. Traded today as low as $2.97. Shares were being traded at just $2.20 during my recent visit, but have since traded as high as $3.74. Just over 2.5 million shares are held by the two key players in the business, Gary Freeman and Mel Herdrick. The Coffin brothers are also closely tied to both the creation and ongoing strategic and tactical operations of the Company. Total insider shareholdings are approximately 3.9 million shares, or slightly less than 10% of issued shares.
An incentive plan has designated insiders rewarded with 2,500,000 Company shares at such point as 1,000,000 ounces of gold (not reserve) are shown, as supported by an independent NI43-101 compliant report. This resource must be identified as coming from three or less of the Company’s original projects, with at least one-half from within a single project.
If successful in showing just 3 million ounces of gold on the collective properties, the current share price reflects 5% of the current price in situ value. If they can show what some are guessing to be in the range of 5 million ounces, that percentage drops to just 3%. A buyout target for 3 million ounces, with market cap at 10% of in situ, would be $6. That target, for 5 million ounces, rises to just under $10. For a tool to help in understanding these ‘what if’ calculations, click here.
Current cash reserves are just under $24 million. With all options and warrants exercised, this rises to $45 million (per Gary Freeman). The monthly burn rate of some $650,000 leaves this one well financed in the immediate future, whether or not the general market goes to Hell in a hand basket.
Much has been made (too much, in my impression) on the Pediment Stockhouse BullBoard over Gary Freeman’s active trading of Pediment shares. Upon reading the repeated negativity posted on this account, I felt it appropriate to review Freeman’s trades on SEDI.ca. Here’s what I found. In the past six months, he’s made 133 sales on the open market for 433,700 shares, with an average selling price of $2.66. During the same period, he’s made 100 purchases on the open market for 152,600 shares, with an average buying price of $2.65. Net shares sold were 281,100. His holdings of Pediment shares were 1,254,700 at the beginning of this period, and 1,231,100 at the end of this period. His holdings over the past couple of years have not much varied from this level. The difference in transaction totals in the past six months are comprised of options grants and a smaller quantity acquired through a prospectus exemption (a little over 250,000 shares). The bottom line here is that Freeman has made some profit by selling lower-cost shares on the open market, yet has steadily maintained his original holdings of shares through re-investment on the open market. This is a common method by which senior officers can make a living in the junior exploration field. My attitude on the matter, quite frankly, is that this is a reality of the business, and there’s no purpose in griping about it. So, to those who constantly complain about Freeman’s trading, I say, get a life. It’s the nature of the business. For those who do not have a half-dozen companies on the go at one time, trading shares acquired through lower-cost options may represent their only source of income. I raised the subject with Freeman when we met. While he shares my general attitude on the matter, he did note that he was aware that some people had a problem with what he was doing (motivated in part, he says, to support the price), and that he would not continue the practice. In the 12 days since we met, I see only purchases on his account.
During the same six month period (actually, all on October 18, 2007), Mel Herdrick sold 60,000 shares on the open market, in just five transactions. His holdings, then, declined from 1,375,305 to 1,315,305 shares. No big deal.
In my time on site with Mel Herdrick, we spoke a number of times about the future for Pediment. I wanted to have a picture painted for me of where and when this Company was heading next. We talked about exploration and we talked about production. While first an explorer, Herdrick expresses no hesitation in contemplating active engagement for himself in production. He’s been there in past lives, and sees no great hurdles in going down that path again in the future. Clearly, he sees viable production opportunities on the near horizon (noting the need for validation in the upcoming NI 43-101, expected in April). The deep oxide ore would make the step from exploration to heap leach production a hop and a skip, rather than ‘one giant step for mankind’. This is not rocket science. Seeing how the current market is reluctant to reward explorers, but seems receptive to producers and near-producers, I wonder what the game plan is to capitalize on this opportunity. Without revealing much in detail, Herdrick did indicate that discussions were presently being pursued on the resolution of that question. Could there be a ‘white knight’ on the horizon for Pediment? Again, only time will tell.
Pediment President, Gary Freeman at PDAC in Toronto, March 2nd
On the first day of the PDAC in Toronto, I met for the first time with Pediment’s President, Gary Freeman, for a couple of hours to pick up where Mel Herdrick and I had left off. No sooner had we sat down than he said, “What I want to talk to you about is the endgame for Pediment.” Do you think maybe he’d spoken to Mel before coming to see me? Also a very affable fellow. The long and short of the discussion is that significant conversations are taking place, both inside the Company and out, with the intent of crafting endgame options for Pediment. What that endgame will be has yet to be determined, but Freeman has hopes for an earlier resolution, rather than later. As I see it, the challenge for Pediment and every other junior explorer, is in determining whether or not it wants, should, or is able to become a producer. If yes, does it remain an explorer, and if so, in what proportion? It’s easy to see the potential to become a little schizoid over this issue, as one tries to move the operation along from one stage in life to the next. I am left assured that Gary Freeman is well aware of the pitfalls of this process, and that he is well versed over nearly a quarter of a century in the business. He insists that he remains focused on shareholder wealth, and that the next stage in Pediment’s life will certainly be designed with that end in mind. Freeman impresses me as a consummate dealmaker. He’s not a geologist. He’s a storyteller, and a pretty good one at that. In difficult times as the market now faces, he’s placed this Company in a strong position. Cashed up, possessing of a number of promising prospects, and likely well poised to move quickly (within a year, if the cards are well played) from explorer to producer/explorer. So what’s missing? From where I sit, Gary Freeman is well qualified to take this Company to, but not into, the next stage of its life. Beyond that point of entry, if intent on becoming a producer, these projects will need to have a strong technical team leading the way. Options for Pediment to consider are: becoming a standalone producer (and hiring or handing off to the techsperts); bringing in the technical team of a production company in a joint venture; and selling part or whole of the Company to an existing producer. I suspect that any and all of these options are currently under consideration… and should be. To his credit, Gary Freeman recognizes that he cannot, on his own, lead this Company with smooth stride, through its next major stage of life. Also to his credit, it is my impression that he may be well qualified to conceive, craft, and create the structure and the deals that leave the Company in a position (in whatever form and structure it assumes) to add significant value to shareholder wealth.
I’m done for now, and on my way for another coffee. Let’s make it rich and sweet.
With respect,
Kevin Graham
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